Efficient stock control

 

Efficient stock control can limit the effects of problems in the supply chain whilst at the same time reduce the amount of capital which is being tied up with excessive stock.

Many companies have adopted the “just in time” ordering policy and as a result have little or no buffer stock.

Whilst this does translate to a reduction in working capital and lower storage costs there are potential problems such as the inability to deal with an unexpected spike in demand.

This policy also means that the purchasing company has little control and is therefore reliant on the efficiency of its suppliers.

The other side of the coin is to maintain a relatively high level of stock holding which ensures that the company never runs out of material and may afford some economies of scale by bulk buying.

As with all things it comes down to a judgement call.

The best measure is stock turnover ratio equals cost of goods sold during a specific time frame, divided by the average stock holding during the period.

The result of this ratio gives the "number of days that on average money is tied up in stocks". The longer this is, obviously the worse this is for the business as the money is not available to be used elsewhere.

An stock turnover ratio of 20 means that the average amount of stock holding during the year has been renewed, or turned over, 20 times over the course of the year.

Dividing the number of days in the period under consideration by the turnover ratio tells you how many days it takes, on average, for the warehouse to empty and then be refilled. The number of days in a year, 365, divided by 20 is 18.25. So the entire stock is fully sold and replenished every 18.5 days, on average.

As a general rule, the higher the stock turnover ratio, the more efficient and profitable the firm. A high ratio means that the firm is holding a low level of average inventory in relation to sales.

 

The measure of trust

 

The most important component in any business relationship is the question of trust.

The ultimate demonstration of trust and good faith is when a supplier delivers goods to a customer on credit terms.

It therefore is incumbent on the buyer that they acknowledge this act of trust and observe the agreed payment terms.

With the current pressures it is easy to understand the temptation of  delaying payment, thereby “pinching” a few days extra credit but this type of behaviour soon begins to pall.

Once a supplier feels that their buyer is taking undue advantage the relationship is damaged sometimes irreparably.

For any relationship to be sustained there has to be mutual benefit.

When a buyer gains a reputation for persistently crossing the line the merit in maintaining the account is called into question.

It is a very short sighted business tactic.

 

False sense of security

 

To maintain your company’s well-being, rigorous monitoring of counter party risk is the order of the day combined with disciplined inventory control.

Just because a customer has always being reliable in the past this unfortunately provides no guarantee as to future performance.

Be alert to tell-tale signs such as erratic ordering patterns, persistent delays in payments, failure to return calls or respond to emails etc.

Very few businesses fail overnight and there are usually enough warning signals which should enable a supplier to implement actions to reduce its risk.

Operating in today’s business climate will continue to test but undoubtedly there will also be opportunities for those placed to take advantage of less efficiently organised companies.

Make sure that when the dust eventually settles that your company emerges in a stronger position.

Telling you what you want to hear

One recurring theme from the analysis of losses made in the financial sector is that the management were totally unaware of the risks which their institutions were running.

To be effective, risk management and risk controls rely on the people operating them.

As has been well documented all too often corporate culture is often dominated by fear and greed and these together make for a toxic combination.

When strategies fail and trading positions spiral out of control these two elements come very much to the fore.

Fear can often lead to individuals embarking on an even more reckless course of action in the misguided belief that it will all come right – the age old gambler’s doubling up mentality.

At the same time recklessness is often driven by greed; the larger the risk the greater the reward should it prove to be a successful course of action.

Against this background it is incumbent on the management to ask the uncomfortable questions and not merely rely on the assurance that all is well and going to plan.

It is always worth remembering that if something looks too good to be true it invariably is.

 

 

Getting your fingers burnt

With the plethora of companies coming to the market much focus is being placed on EBITDA – earnings before interest taxes dividends and amortisation.

EBITDA has increasingly become the key metric to show the "intrinsic operational performance" of the business, i.e., the performance when all costs that do not occur in the normal course of business (e.g., restructuring costs, ramp-up costs, consulting fees for special projects, special legal fees) are ignored. While this is helpful in general, it is often misused by declaring too many cost items as "one-offs" and thus boosting profitability.

Many of the companies have as yet only traded at a loss and based on their history, there is no basis for concluding that these unprofitable companies will ever make money. 

That’s the stock in trade for a company about to float whilst losing money. If it were making a profit before its IPO, it would be harder to make bullish forecasts about how much profit the company will generate in the future. 

Ironically for a company losing money, the sky’s the limit when it comes to predicting how bright its future revenues will be. 

In tandem with the ability to forecast a spectacularly profitable future is the functioning of one of the market’s most basic laws: momentum. In other words powered by its own performance a stock that is gaining value up will continue to appreciate in value just because it is going up. 

More specifically, when there is no real positive cash flows on which to value a stock, its price will rise because investors who do not own the shares will want to climb aboard the bandwagon rather than miss out. 

This wave of “new buying” can help to drive up the shares further, which will attract a new buyers creating a dangerous bubble. 

It would probably be a more prudent strategy to avoid the money-losing IPOs and invest in companies who are making a profit before they try and float their shares. 

However forecasting the price of stocks remains an inexact science and unfortunately for the investor there is as yet no failsafe basis on which to explain why stocks go up and down.

 

RBS – still a long and winding road

The latest figures published by the RBS Group make for sobering reading.

The bank's pre-tax loss for 2013 was £8.2bn, compared with £5.2bn in 2012. In 2008 RBS posted the worst loss in UK corporate history of £24 billion.

The average share price paid by the government in 2008 was 500p with the current price languishing around 320p.

According to the head of RBS he estimates it will take a further three to five years for the bank to recover.

The strategy would now appear to focus on a "back to basics" approach.

This will see the group offering simpler retail products, cutting the length of time it takes to set up a current account, and rewarding the loyalty of existing customers, rather than offering "sweeteners" to new customers.

In a nutshell RBS are attempting to reposition themselves to offer a service based business where the customer feels valued.

However, there is still the hangover of the bonus culture which many would argue was one of the major factors which necessitated the UK Government stepping in and saving the Bank in 2008.

Despite the increased loss, RBS set aside £576m for staff bonuses in 2013, a drop of 15% on 2012. Of that sum, £237m went to investment bankers.

So whilst the management claim that they have identified a strategy to take the Group forward and in doing so offer some comfort to its shareholders (primarily the UK tax payer) it is still open to the charge of rewarding failure.

When China wakes up, the world will shake

 

The above quotation which is attributed to Napoleon during his exile at St Helena is almost 200 years old. It was an extremely prescient view and certainly resonates today.

 

During the last decade we all saw the results of the dynamic Chinese export programme as goods poured into the US and EU markets.

 

In tandem with its export led growth we have witnessed a marked step up in acquisition of assets by China following the recent economic problems particularly in the US.

 

However there is another factor emerging as China steps up its demand for raw materials particularly agri commodities.

 

The burgeoning Chinese middle class will continue to demand products which traditionally consumed in the Western world.

A case in point is the increased purchasing by China of Almonds. A “Young at Heart” campaign in China focussed on the idea of “perpetually feeling good” fuelling demand and resulting in price hikes for this premium nut product.

 

As dietary patterns in China become more westernised this will lead to upward price pressure in all sectors of the food industry.

 

This demand will only continue to grow and it will surely become a case for Western consumers of “wake up and smell the Coffee” – whilst you can.